Editor in chief Rick Pullen sat down with Susan Hayes, principal at Chicago consulting firm Pharmacy Outcomes Specialists and head of Pharmacy Investigators and Consultants. She audits and investigates corporate prescription costs to help employers control medical expenditures.
Susan is currently working on her Ph.D. at the world’s leading center in healthcare fraud, the University of Portsmouth in the United Kingdom. During her career, she has seen a lot, including her share of fraud, while saving her clients millions on prescription drugs. Her biggest concern today in the pharmaceutical sector of the healthcare industry is the lack of transparency in prescription drug pricing, and she is not shy about sharing her views. —Editor
Explain what you do.
We help benefits plan sponsors find pharmacy benefits managers, monitor their performance, review their clinical programs and review their contracts. I have a second firm, Pharmacy Investigators and Consultants, which essentially does fraud, waste and abuse analysis. We help managed-care organizations and some small PBMs uncover corrupt practices.
Describe the PBM landscape.
It’s dominated by three large PBMs that have 80-100 million lives covered under each one of them: Caremark, Express Scripts and Optum. Then there’s a second tier that includes MedImpact, Envision, Navitus, Marken Healthcare, WellDyne and Magellan. There’s probably a total of a dozen in this category. Finally, there are the tiny PBMs, which are basically resellers.
If I’m a corporation with 1,000 employees, how many PBMs do I have to choose from?
Realistically, probably 15 to 20.
CVS is about to buy Aetna. Cigna is about to buy Express Scripts. What does this hold for employers and the insurance brokers who represent them?
I don’t think it’s a good thing. The lack of transparency that is already in the industry will just get murkier. We now have an insurance company owned by a PBM, with the Caremark-Aetna deal, if it goes through. So you can underwrite a medical plan, keep all the rebates and it’s all within one company. You really have no ability to understand what the rebates are in the prescription drug plan.
Is the medical loss ratio meaningless in this case?
Exactly. The same thing has happened already with Optum merging with United Healthcare. That was the writing on the wall. Cigna’s claims processing system is owned by Optum. That meant Cigna had to find its own claims processing system not owned by a competitor. They needed to buy a PBM, so Express Scripts was something that was inevitable. It doesn’t bode well for employers or consumers, because there will be a lot less transparency.
How does CVS buying Aetna fit into this?
CVS is really two companies—a pharmacy chain and the PBM Caremark.
Anthem will be using Caremark while Caremark owns Aetna. There are geographic markets where Anthem and Aetna compete. I don’t see this relationship lasting long.
One reason reported for the Express Scripts deal was it would keep Amazon out of the PBM business. What is the threat?
Amazon announced it’s getting into the PBM business last year. The scuttlebutt is they’re now looking for a backbone claims processor.
The Affordable Care Act is not what it used to be when Obama was president. Amazon’s thinking is we have all of these young millennials in high-deductible plans. They’re going to want to purchase drugs cheaply, and they’re going to want them delivered next day—just like they get their groceries and everything else from Amazon.
I think that’s Amazon’s play. But it will need a claims processing system to adjudicate that and tie into other PBMs. The question is will other PBMs play nice with Amazon?
I know from experience with my PBM that they’ll say a prescription has been shipped, yet it takes a week or 10 days for it to arrive. Are PBMs high-tech at all?
No. They can’t get the drugs out the door because of their legacy systems.
You’ve got all these different legacy platforms and huge 70,000-square-foot mail order facilities, which are just nothing but overhead. You don’t need to house these medications in one central location. That’s how Amazon gets things to you quickly. It has the product out in the field, and it never really takes possession of it.
I ordered a book on a Saturday, and literally it was in my mailbox the next day. That’s what millennials are expecting from their prescription drugs, and that’s what Amazon promises to deliver.
When we help an employer with a pharmacy benefit plan, if it’s a traditional or spread contract, it’s difficult, if not impossible, to figure out what the PBM is going to make.Tweet
What do you predict will happen?
About 10 or 15 years ago, when the whole concept of banking went online, people said, “Who needs tellers? We can just have an online bank. We’ll keep your money, and you just do transfers over the internet.” Fifteen years ago people were skittish about that, but now it’s caught on. I think the same thing will happen in the prescription drug industry. Which kind of begs the question: what happens to the role of pharmacist? If you’ve been on a drug for a period of time, you don’t need a pharmacist telling you how to take it.
Does that might mean pharmacists will be working in PBM warehouses instead of at your local pharmacy?
I think so or a lot of retail pharmacies will go to dispensing and delivering in their area. Amazon will transfer the prescription to the local Walgreens, which will deliver it to me within hours. They’ll use Whole Foods or some variety of retail pharmacies they can get to deliver things quickly.
Brokers are complaining about transparency. Where is the lack of it, and where does it exist?
Everywhere within the cycle of a prescription drug there is lack of transparency. I think most notably when people say there’s lack of transparency what they’re talking about is a lack of understanding of prescription drug pricing.
Here’s an example. You buy your Lisinopril. You have a $10 co-pay, and you pay the pharmacist. She gets another $2. It’s a $12 prescription. And then your employer gets charged $25. The PBM takes the $13 spread and does not disclose it to the plan sponsor or to the pharmacy. Neither understands where the money went. Who made $13 on that prescription? They just never tell you.
When we help an employer with a pharmacy benefit plan, if it’s a traditional or spread contract, it’s difficult, if not impossible, to figure out what the PBM is going to make. You also don’t know what fee they’re going to take behind my back on claims.
I’ve read examples where the consumer pays “x” amount, which is actually more than the actual cost.
Yes, that’s right.
Let’s say it costs $5 for a prescription and the sponsor is paying $25. Where does the money go?
In your example of a $25 co-pay, say the member has paid the entire co-pay based on the contract between the PBM and the plan sponsor. That contract allows them to take the entire co-pay, even if the cost of the drug is lower. Certain contracts allow that. That’s one side of it.
And then you go to the pharmacy and they’re not being told what’s going on. The pharmacy’s arrangement with the PBM is to be reimbursed a lower price—or the lower of the cost of the drug and the co-pay. Then the PBM claws back the amount that the pharmacist has already taken as part of the co-pay.
The pharmacist gets what?
The pharmacist gets $5 or whatever. He initially collected $25, thought he was going to get $25, and then he gets $20 taken back, or $5, or $2 or whatever it is, taken back.
What kind of profits per prescription do PBMs make?
It’s estimated in the research that we’ve done that it’s about $15 to $20 a script. Some may only be $1 or $2—like a generic—but the brands may be $40 or $50.
PBM salespeople’s commissions are based on profitability. They know exactly what the profitability of each new sale is going to be. The PBM salesperson plays a delicate game. If he sets the price low enough to obtain the business, he then faces the conundrum that he must get the margin as high as possible so he can be compensated.
What kind of profits do PBM companies make?
It depends on each individual PBM. There are probably some making 3% to 5% profit, but then they’ve outsourced everything. The more insourcing, the more ability they have to make profit.
Express Scripts now even owns a wholesaler. Do you realize how bizarre that is? Because wholesalers are the ones that establish pricing. When your PBM owns a wholesaler, think about that. They buy drugs from that wholesaler. That wholesaler sets the price. You’re buying from a wholesaler you own and control and you tell what to do.
It’s fair to say they raise the price of drugs.
Absolutely, it’s fair to say that.
And pharmaceutical companies can charge anything they want in there.
When your PBM owns a wholesaler, think about that. They buy drugs from that wholesaler. That wholesaler sets the price. You’re buying from a wholesaler you own and control and you tell what to do.Tweet
If the insurer is independent, it would be on the other side of this equation.
And it would be fighting for better pricing.
Absolutely. But when they’re buying PBMs there’s no incentive. In fact, their incentive now becomes to play the game with everybody else.
Are smaller PBMs more transparent?
You have smaller PBMs that have their own retail network contracts, and those can be transparent because they own the contract between their company and the pharmacy chain. They know exactly what they’re going to be reimbursing the pharmacy chain.
Some smaller PBMs resell other PBMs’ networks. A small PBM may go to Magellan, for example, and Magellan owns their own contracts. Magellan will then sell them the retail network. At that point, the PBM that’s using Magellan does not know what Magellan’s spread is. So, yes and no. Some of these smaller PBMs are transparent, and some aren’t.
You’ve got to ask some really deep questions. Do you own your own retail network? Are you leasing another PBM’s retail network system? Do you know what spread the networks are taking? And then do the same thing with rebates.
How can everyone be satisfied: consumer, sponsor, pharmacy, PBM, carrier? People need to make a profit.
I totally agree. I want that on the record. PBMs need to make a profit. We want them to make a profit because they provide a very good utility in the industry. We want them to be viable, we want them to be profitable, but we don’t want them to have undisclosed spread where you can’t evaluate how much they’re taking on your pharmacy bill.
Are mergers with insurers a conflict of interest?
Absolutely. In my view of the world, I think it’s absolutely a conflict of interest. When you’re hiring your medical carrier or you’re hiring a PBM, you don’t think the two are in cahoots. There’s no separation of duties here, where the PBM says, “Maybe you don’t need all those high-cost drugs.”
Isn’t the PBM supposed to be representing the corporate client and the consumer?
I think originally in 1985 that was their mission. I think their mission today has become much murkier. They changed their allegiance somewhere between 1985 and now—depending on the company—to the drug manufacturers and insurance carriers as they merge.
If you are a very large health plan and you want to have a PBM relationship, you don’t have many choices. There’s not a middle tier that’s going to have the ability to take on five million or two million lives. That’s probably why Kaiser does it themselves. But others don’t have that ability.
For most employers between 1,000 and 10,000 lives, you don’t want to go to those big PBMs. Big PBMs are already serving 80 million lives. They’re not going to love a client with 5,000 or 1,000 lives. They’re not going to give them attention or account service or be beholden to them.
If you’re a 1,000-life employer, you’re going to probably go to the middle tier and get very good service. And then it’s going to depend on you and where you are and who’s your account rep. If you’re a hospital, you probably would go to American Healthcare. They excel in that line of business. If you want to go with Magellan, you’re probably some kind of government. You know, they do really well with government plans.
Each one of these middle-tier PBMs has a personality. You can’t really say who the best is. It depends on you and who you are and what your baggage is.
What excuses do PBMs give for not being transparent?
They say it’s none of your business. I contract with you for a certain price— you, in this case, being the corporate client. You either like that price or you don’t. And I may contract with a pharmacy for another price, and that’s nothing to do with you.
What can brokerages do to help clients with this?
Most of the national brokerages have PBM experts. They understand this. Smaller brokerages need to be able to plug into some kind of expertise. This is an extremely complicated industry with extremely complicated contracts, and you need to know all the little angles within the contract to advise your client.
A lot of states are digging into PBMs. What do you think they find?
That is a whole can of worms. The state of Arkansas passed legislation that basically told PBMs they couldn’t reimburse a pharmacy less than what you could buy that drug for. Arkansas is pretty unique. Arkansas has a lot of rural pharmacies. You don’t have a lot of big chains buying in huge bulk. The state is saying PBMs can’t reimburse anyone less. The trade association representing PBMs sued Arkansas to stop this. I think they will prevail.
They are a utility we desperately need in America, and they ought to be regulated like a utility where there aren’t these gross and excessive profits. That’s the kind of thinking we need to evolve around.Tweet
South Dakota has similar legislation. Alaska has talked about it. It is nuanced because it is so spread out. One of the things PBMs forbid their pharmacies in network to do is mail prescriptions. They don’t want competition with their own mail order facility. But in Alaska, where you have to go an hour and a half to get a prescription drug—that’s the local pharmacy—a lot of the local pharmacies there mail drugs, and PBMs want to kick them out of the network. I mean, how else are these people living in small villages in Alaska going to get their prescriptions?
Connecticut is considering legislation promoting transparency, saying you need to be able to understand prices. If you ask your PBM, they have to explain the differentials in pricing as well as you may choose an auditor of your choice. I don’t know where that’s going in Connecticut, but Hartford is the insurance capital of the world. Will that affect transparency?
What about the feds?
I think the feds have missed the boat. I think when President Bush passed Medicare Part D, the federal government could have required they negotiate pharma pricing. They did not. That’s unfortunate because now we’ve got Medicare Part D where you’ve got the same thing going on with spread pricing. Allegedly, there’s not supposed to be spread pricing in Medicare Part D, but there are all kinds of other games that are being played.
The federal government had the opportunity to negotiate drug prices, just like Canada, just like England, just like every other first-world country. Instead, they let the market compete, and that was a mistake. Can the feds ever catch up now that the cat’s out of the bag? I don’t think so.
What’s the biggest problem we face with PBMs that we can do something about?
I think when PBMs became publicly traded entities where they had to make Wall Street earnings every quarter, all of a sudden they had perverse incentives. They are a utility we desperately need in America, and they ought to be regulated like a utility where there aren’t these gross and excessive profits. That’s the kind of thinking we need to evolve around. We have seen where 25 to 30 years of market pressure has done nothing to control costs.
As a consultant, how much money can you save your clients?
Probably 10-15%, easy. And, you know, like for one of my clients, we have been auditing them and their PBM for 12 years. You would think that by this time the PBM would be aware that we were auditing and that we’re going to have findings every year and that they would do things the right way. And every year we have money coming back to our clients because we audit.
To give the PBMs credit, this is a hard business to come up with a financial projection. Because you have a bunch of employees on January 1 and even after a completely transparent pass-through arrangement, you don’t know where those employees are going to go. You don’t know if they’re going to go to Walgreens or independent pharmacies. You have to bet on where they’re going for their prescriptions and then come up with a discount off average wholesale price that’s going to meet that.
PBMs are not always accurate in their forecasting. They’re going to make mistakes. They’re going to make projections that they know they can’t meet just to get the business. That’s where we come in to audit these programs. And that is a major problem right now of auditing.
How do PBMs charge their employer clients?
In a transparent arrangement, they have an administrative fee where they may charge $5 per member per month for services for account management and their eligibility maintenance and their rebate negotiation. We audit performance guarantees. If they don’t meet them—maybe because the retail brand claims aren’t at 15% as projected but come in at 14.76%—that 0.25% difference we’ll get back for our clients.
And that’s substantial?
Even a half a point or a quarter of a point is substantial when you’re spending $100 million a year.
Do most businesses of that size hire someone like you to do this?
No. Probably less than 1%. And the PBMs are making it harder and harder to audit. Four of them decided about a year ago they were not going to let audits proceed. And so they came out and said my firm and other firms like mine— independent, small auditors—would not be allowed to audit them. Now, they can supposedly give clients fantastic discounts off average wholesale price and they’ll never be held accountable.
Can we operate without PBMs?
No, not in the current healthcare system. The government isn’t going to get involved. We don’t have a national health service like the United Kingdom. So we need PBMs, but we need them to operate similar to the 401(k) fiduciary role. That’s what’s going to change PBMs. When they have to act solely for the benefit of the member—the beneficiary—that’s when the PBM industry will change. And I predict that will be the demise of some of the biggest in the business.
Is there any movement to put pressure on PBMs?
I think there is within the Department of Labor. I think there’s more of a move than I saw four or five years ago. It was under the Trump administration that ERISA, what’s called the fiduciary rule, got implemented for 401(k) plans. I’m hopeful that within the next three years that happens to PBMs.
Brokers are trying to lower costs for clients, and they’re really frustrated with the current system.
I guess if I was to advise consultants, fellow consultants and brokers, I would say educate yourself, get expertise. These contracts are really complicated. These are 40-50 page documents full of “I gotchas” and “get out of jail free cards.” They’re very complicated. I think attorneys who work in this area often don’t understand the nuances of these contracts. I’ve had top-shelf attorneys look at a contract and read right through where it says, “mutually acceptable auditor.” That seems like nice language. Yet you don’t want an auditor who is somebody’s brother-in-law that’s never been in the PBM industry. But if you have 22 years’ experience in the PBM industry, a PBM can still block you from an audit.
What’s one of your most interesting cases?
We’ve done some really interesting work with hospitals. A lot of the rural hospitals in America are small and typically contract for pharmacy benefits with Blue Cross/Blue Shield and whatever PBM comes along with a big carrier. What we’ve done is carve out those PBM relationships. In one case, we eliminated the spread pricing at the hospital pharmacy for its employees. That did two things: it eliminated spread, which was about 15%, and it enabled better bulk purchasing because we’re driving all that volume from the employees into the hospital pharmacy.